Abstract
Credit risk management (CRM) is to identify, measure, monitor, and control risk arising from the possibility of default in payments. Existing CRM tools available for large financial institutions do not meet the requirements of rural commercial banks (RCBs) because their main customers are SMEs and farming households whose financial data and credit rating records are not available. RCBs in China also expose specific risks connected to rural commercial banking business and in particular farming-related loans and services. Adopting a qualitative analysis approach to identify key factors contributing to failures of RCBs’ customers, we endeavour to develop a CRM framework for RCBs in China. The framework, which is based on the identification of business failures of RCBs’ customers and factors contributing to failures of SMEs and farming households, incorporates financial and non-financial variables. Using nonfinancial variables along with financial variables as predictors of company failure significantly improves credit analysis quality and accuracy. Also, this study recognises guanxi1 as risk potentials and includes guanxi risks in the framework. This study has made contributions to the extant literature on CRM of banks in general and RCBs in particular.
Highlights
Credit risk is a major risk faced by financial institutions as it takes up to 60.0% of risks that banks normally face (McKinsey & Company, 1997)
rural commercial banks (RCBs) in China expose specific risks connected to rural commercial banking business and in particular farming-related loans and services
RCBs are exposed to risks inherent to specific rural commercial banking business and in particular, Sannong-related loans and services, in addition to usual risks faced by financial institutions
Summary
Credit risk is a major risk faced by financial institutions as it takes up to 60.0% of risks that banks normally face (McKinsey & Company, 1997). Chinese financial institutions have been facing huge credit risk exposure reflected in the high level of bad loan (China Rural Commercial Bank Market Report, 2010-2011). RCBs are exposed to risks inherent to specific rural commercial banking business and in particular, Sannong-related loans and services, in addition to usual risks faced by financial institutions. For many RCBs, their business focus is to provide high-quality financial services to SMEs in rural and county areas and serve the needs of Sannong. This research attempts to develop a CRM framework for Chinese RCBs. The framework incorporates main factors that affect credit risk facing RCBs in relation to environmental, operational, financial and guanxi variables contributing to failures of SMEs and farming households, the main customers of RCBs in China. The final section concludes the paper and highlights the limitations and future research directions
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
